Both a static foreign exchange rate and inflation, fourfold that in the US and the rest of Latin America, lead to overvaluation of the Venezuelan bolivar, imported products cheaper than domestic products, and the consequent skyrocketing imports.

Therefore, demand of US dollar for imports is virtually impossible to meet. Companies have cut down production amid low-cost imports and the Government has no other choice but to devalue the currency.

Imbalances stemming from overvaluation are currently quite critical. Think tank Ecoanalítica's CEO Asdrúbal Oliveros reckons that for fully correcting overvaluation, an adjustment of 114% is required in the foreign exchange rate, from VEB 4.30 to VEB 9.22 per US dollar.

In a statement issued on Monday, former Finance Minister Rodrigo Cabezas asserted, "the best scenario is to handle the forex rate so that our economy can be more competitive. This would be done by means of exports and industrialization. Otherwise, we would be doing the same thing that has been done over the last 30 years, that is, devaluation to boost fiscal income, which has always had an inflationary impact."

Notwithstanding, everything suggests that there is no way implement devaluation in order to favor competitiveness without pushing the price of imported products and inflation up.

It is also worth noting that devaluation as a move to boost exports does not yield results in the short term. Rather, it has resulted in low profits, amid price regulations and low investments in the private sector, which curb domestic production.

Funds

The Venezuelan Government's economic cabinet is already weighing devaluating to bridge the gap between income and public spending, which is 16% of the gross domestic product, according to Bank of America and Barclays Capital.

Devaluation would translate into more bolivars per petrodollar, yet any economic adjustment may be put off amid uncertainty about President Hugo Chávez's health and the possibility of holding elections in the short or middle term.

"If the Government delays forex rate adjustments, we will see higher debt in bolivars through bond sales and Treasury bills, and more US dollars loans from China," Oliveros said.

He added that if it chooses not to devalue, the Governments would curb political risks, but would face likely shortage of basic staples, as "there are not enough US dollars to sell at VEB 4.30 per US dollar. In 2012, the funds saved abroad dropped 36%, from USD 18.30 billion to USD 11.70 billion."

Further indebtedness prevents the Government from bridging the fiscal deficit. Thus, the Government will have to continue depending on the funds provided by the central bank via the printing of more bolivars, a mechanism further fuels inflation.

Translated by Jhean Cabrera

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Hundreds of thousands of demonstrators took to the streets of Brazil on March 13 to demand the ouster of embattled President Dilma Rousseff, carrying banners expressing anger at bribery scandals and economic woes. A banner read "We don't want a new Venezuela in Brazil."